1. Chapter 17 Regulation Copyright 2015 Health Administration Press

2. After mastering this material, students will be able to  describe the importance of regulation,  explain the interest group model of regulation,  analyze the effects of regulation, and  discuss alternatives to it. Copyright 2015 Health Administration Press2

3. THE RATIONALE FOR REGULATION Copyright 2015 Health Administration Press3

4. Equity and Market Failure  Equity – Incidence of ill health is highly skewed. – A few people bear all the burden and quickly exhaust their resources.  Market failure – Better results are possible for some without worse results for others. Copyright 2015 Health Administration Press4

5. Market Failure  Externalities: Protecting you protects me. – Immunizations – Water and sewer systems – Infection control  Public goods: Some things benefit everyone. – Research – Information dissemination – Standards Copyright 2015 Health Administration Press5

6. Market Failure  Asymmetric information results from – well-informed professionals, and – poorly informed consumers.  Potential consequences can include – low quality, – high prices, and – unnecessary services. Copyright 2015 Health Administration Press6

7. SOME EXAMPLES Copyright 2015 Health Administration Press7

8. Regulation of medical care  is extensive,  has had mixed results,  is motivated by consumer ignorance,  often reflects industry interests, and  is likely to be imperfect. Copyright 2015 Health Administration Press8

9. Types of Regulation  Price regulation – Medicare rates – Medicaid rates – Affordable Care Act (ACA) requires medical loss ratios >80 percent – Other? Copyright 2015 Health Administration Press9

10. Types of Regulation  Entry regulation – Physician licensure – Insurer licensure – FDA approval – Certificate of need – Other? Copyright 2015 Health Administration Press10

11. Types of Regulation  Competition regulation – Antitrust regulation – Licensure laws – Patent law – Other? Copyright 2015 Health Administration Press11

12. Types of Regulation  Public quality regulation – Inspections – Mandatory disclosure – Incentives for meeting quality metrics – Other? Copyright 2015 Health Administration Press12

13. Types of Regulation  Private quality regulation – Accreditation – Certification – Scope-of-practice limits – Malpractice suits – Other? Copyright 2015 Health Administration Press13

14. Regulation of Healthcare  Regulation is extensive. – Public – Private  Regulation works imperfectly. Copyright 2015 Health Administration Press14

15. Regulation of Healthcare  Regulation is extensive.  Regulation works imperfectly. – Most price regulations have failed in the United States. – Most quantity regulations have failed. – Most entry regulations benefit the industry. – Quality regulations “work” at high cost. Copyright 2015 Health Administration Press15

16. Regulation  Regulation is hard to do effectively. – The industry usually captures the process. – Financial and regulatory incentives conflict. – Another arena for competition  There are often alternatives. – Competition and market responses – Tort and contract law Copyright 2015 Health Administration Press16

17. WILL MORE REGULATION BE BETTER THAN LESS? Copyright 2015 Health Administration Press17

18. In practice, will more regulation be better than less?  An empirical question  Often answered on the basis of – ideology – self interest Copyright 2015 Health Administration Press18

19. Healthcare Markets in Practice  Often not ideal because of – consumer ignorance, – provider market power, – a desire to subsidize care for the poor, and – distortion of incentives by insurance. Copyright 2015 Health Administration Press19

20. Healthcare Regulations in Practice  Often not ideal because of – provider capture, – conflicting incentives, – need for decentralized decision making, and – vague and conflicting goals. Copyright 2015 Health Administration Press20

21. Regulation has three parts.  The underlying law  The regulations written for that law  The enforcement of those regulations Copyright 2015 Health Administration Press21

22. All three parts involve politics.  The underlying law  The regulations written for that law  The enforcement of those regulations Copyright 2015 Health Administration Press22

23. The process balances  public pressure (if any) for action,  interest group pressure for action, and  conformity with prevailing ideology. Copyright 2015 Health Administration Press23

24. Consumer ignorance  is rational because knowledge – costs a lot to acquire, and – has small expected benefits. Copyright 2015 Health Administration Press24

25. Consumer ignorance  means that patients – may not know when to seek care, – may not be able to evaluate recommendations, – may not be able to evaluate quality of care, and – may not know the price of care; and  exposes consumers to opportunism. Copyright 2015 Health Administration Press25

26. The economic model predicts that regulations will  usually reflect provider interests,  eventually be captured by providers,  be inflexible and hard to change,  be designed to protect regulators, and  be insensitive to consumer goals. Copyright 2015 Health Administration Press26

27. Interest groups seek to  increase demand for members’ products. – ADA efforts to expand dental insurance – AMA efforts to prohibit midwifery  increase payments for members’ products. – Optometrists’ efforts to outlaw price ads – AMA support for any willing provider legislation – Case-by-case participation in Medicare  and reduce the price of complements. Copyright 2015 Health Administration Press27

28. Interest groups seek to  increase demand for members’ products,  increase payments for members’ products, and  reduce the price of complements. – AHA support for the Nurse Training Act – AMA support for “tort reform” Copyright 2015 Health Administration Press28

29. Interest groups seek to  restrict substitutes. – Hospitals try to limit ambulatory surgery centers. – Doctors seek to restrict practice by nurse practitioners.  limit increases in supply. – Many EU countries restrict opening pharmacies. – Most US states do not have reciprocal licensure. Copyright 2015 Health Administration Press29

30. Problems with Regulation  Suppliers eventually “capture” regulators. – Suppliers have information regulators need. – Suppliers have a continuing interest. Consumers do not. – Suppliers have an intense interest. Consumers do not. Copyright 2015 Health Administration Press30

31. Problems with Regulation: Favoring the Status Quo  New producers often lack power.  Political change is difficult.  Inaction is usually safe for regulators. Copyright 2015 Health Administration Press31

32. Is more regulation (in practice) better than less (in practice)?  Flawed unregulated markets have flaws. – Quality will be too high or too low. – Consumers will face high markups. – Poor will not be served.  Regulated markets – may not be better, and – will usually be less flexible. Copyright 2015 Health Administration Press32

33. Economists favor deregulation, but markets require rules.  To reduce information needs  To encourage consumers  To protect honest producers  To make imperfect agency less attractive Copyright 2015 Health Administration Press33

34. Markets  need rules to work. – Enforceable contract laws – Enforceable property rights laws Copyright 2015 Health Administration Press34

35. The emerging structure of healthcare in the United States is unique.  Competition among healthcare plans  Push to reduce public regulation  Extensive private regulation Copyright 2015 Health Administration Press35

36. But the ACA changed rules for insurers.  Guarantee issue and renewability  Limited rating variation – Area – Age (limited to 3 to 1 ratio) – Family composition – Tobacco use Copyright 2015 Health Administration Press36

37. But the ACA changed rules for insurers.  Set up exchanges  Established benefit tiers  Established essential benefits package  Standardized dependent coverage  And more Copyright 2015 Health Administration Press37

38. CONCLUSIONS Copyright 2015 Health Administration Press38

39. Healthcare Markets  Markets and regulations are imperfect.  Will new regulations improve outcomes? – An empirical question – Not answerable by ideology Copyright 2015 Health Administration Press39

40. Flawed regulations contribute to the inefficiency of healthcare markets.  Licensure  Malpractice laws that – reward hiding problems, – do not reward most victims of malpractice, and – encourage large legal fees  Bizarre taxation of health insurance  Unwarranted tax breaks for not-for-profits  Suppression of information Copyright 2015 Health Administration Press40

41. Can better public regulations  improve performance – at all? – more than private regulation?  be enacted? Sometimes yes and sometimes no. Copyright 2015 Health Administration Press41

42. Conclusions  Healthcare regulation is – important, and – widespread.  Its motivation – is ostensibly consumer protection, and – may be interest group protection.  Legislation and regulation are political acts. Copyright 2015 Health Administration Press42